The Employee Retention Credit (ERC) was introduced to aid businesses in retaining their employees during the pandemic-induced shutdowns. However, its complex eligibility rules made it an attractive target for fraudsters. Small businesses were targeted by scammers who charged them fees for assistance with ERC applications, even if they did not qualify for the credit.
To address the issue, the IRS launched a voluntary disclosure program that allowed small businesses to return funds they received in error and keep 20% of it. Over 500 taxpayers participated in the program before it ended on March 22, with another 800 submissions still being processed. Additionally, 1,800 businesses have withdrawn $251 million worth of unprocessed claims through an ongoing program.
The IRS has also conducted audits on more than 12,000 businesses that filed over 22,000 improper claims, resulting in $572 million in assessments. IRS Commissioner Danny Werfel expressed his concern over the widespread abuse of the ERC claims that have caused harm to small businesses. The IRS stopped processing new claims in September but plans to resume processing in the spring, with an additional $3 billion in claims under review by the IRS Criminal Investigation.
The success of these initiatives shows that the IRS is making progress in recovering improperly distributed funds under the ERC. However, there is still much work to be done to prevent fraud and ensure that small businesses receive the assistance they need during difficult times.
